REFILE-U.S. farm bankers nervous about bullish outlook

KANSAS CITY, June 11 (Reuters) - U.S. farmland prices have
been firming as China's heavy purchases of the country's farm
exports have fueled a boom in agriculture.

Still, many veteran U.S. farm lenders are nervous about
agriculture's historical tendency to boom-and-bust cycles.

"Everybody is on board with the great demand story.
Sometimes that should raise a red flag," said Michael Swanson,
agricultural economist with Wells Fargo & Co, top private bank
lender to U.S. agriculture.

"When nobody opposes the story or raises any countervailing
argument, you really have to wonder what are we missing."

Swanson and other bankers at this week's farm lending
conference hosted by the Federal Reserve Bank of Kansas City
pointed to several clouds on the horizon amid the bullish
outlook for U.S. exporters, already the world's leading source
of food and fiber from grains to cotton to meats.

From a potential farmland bubble to higher interest rates
to volatility in grain, meat and cotton prices, cautious
lenders appeared to still be licking their wounds from the
recent boom-bust effects of the global recession.

"Everybody is in agreement the demand is out there. I think
a lot of people in this room are very concerned about the
volatility around that demand," Swanson said. "There are a lot
of things that could upset the apple cart."

Recent surveys from Midwestern Fed banks have shown that
farmland values in the U.S. grain belt, the world's most
productive, steadied and began rising again in the first
quarter of 2010, as farmers and outside investors bought more.

That key barometer has been joined by China's buying binge
for U.S. grains in particular to boost U.S. farm prices. China,
which already consumes more than half of U.S. soybean exports,
recently bought its first U.S. corn in four years. This week it
also snapped up 80,000 tonnes of U.S. soyoil, boosting prices.

U.S. Agriculture Secretary Tom Vilsack on May 20 said
thanks to China buying more than $10 billion in farm goods in
the first half of 2010. U.S. exports in the period set a record
high of $59 billion and will be revised up for the year.

CLOUDS ON THE HORIZON

But economists and lenders say that's not the whole story.

"The bullish side of agriculture is growth through
increased demand, but we've always got the problem of getting
overzealous, building for anticipated demand," said Jim
Farrell, top exec of Farmers National, the largest U.S. farm
management firm. "An example of that is the ethanol industry.
We had a good ethanol industry then got bullish and built and
built. We suffered...that industry is starting to recover."

Kansas City Fed president Thomas Hoenig, who has argued for
higher U.S. rates now, told the ag bankers that he was watching
the firming farmland values carefully.

"Following the decade of the 1970s into the early 1980s, I
saw land values accelerate and I saw banks make loans on the
assumption that land values could only go up," he said.

"That was just before all the markets collapsed, when 350
banks failed in this region alone," Hoenig said. "When I hear
people saying that land values are again increasing rapidly and
we are getting the phone calls from the investors -- that's
when I get really worried."

Douglas Stark, chief executive of Omaha-based Farm Credit
Services of America, said lenders must learn to better manage
their exposure to volatile grain and livestock prices.

"Volatility is twice what it used to be. It's not the
impact of the averages that bothers me as a lender, it's the
impact of the exception. As lenders we're looking at those dips
and tails and do we have the financial capacity and wherewithal
to really see through these dips and tails," he said.

Given the current trend in LIBOR interest rates, factoring
in higher inflation, a normal yield curve "I've got long-term
rates that are double-digits," Michael Boehlje, a Purdue
University economist, told the lenders. "I think we need to
prepare ourselves for that kind of potential."
(Editing by David Gregorio)